Bank of England should cut rates gradually, says policymaker

Britain should adopt a “steady-as-she-goes” approach to cutting interest rates, one of the Bank of England’s most hawkish ratesetters believes.
With borrowing costs having been reduced for the first time in four years last month, Megan Greene, an American economist and an external member of the central bank’s monetary policy committee, said that in future interest rates should fall in a “gradual” manner.
Greene has yet to vote for rate cuts during her time on the MPC and was one four members of the nine-strong committee that wanted the base rate to be left unchanged at 5.25 per cent in August. She was outvoted by a slim majority of five, which included Andrew Bailey, the Bank’s governor.
In a speech to the Newcastle Chamber of Commerce, Greene said there was a greater risk of inflation remaining stubbornly high because of persistently strong wages growth and companies raising their prices, rather than of inflation falling significantly as global shocks to energy prices unwind.
“I believe a cautious, steady-as-she goes approach to monetary policy easing is appropriate,” she said. “Services inflation has been moving in the right direction, but catering has accounted for roughly half of this fall since October 2023, partly reflecting falling food prices inflation rather than domestic inflationary pressures.”
Greene also warned that the neutral rate of interest — the level at which monetary policy is neither too loose nor too tight — could be higher in Britain than first assumed. “Wages growth has also fallen, but it remains above what our suite of models can explain. I believe the risks to activity are to the upside, which could suggest that the long-run, neutral rate is higher and, all else equal, our stance of policy isn’t as restrictive as we had thought.”
This week Bailey said it was unlikely that the UK would return to the rock-bottom interest rates that had lasted for more than a decade after the financial crisis in 2008. “To go back down to those levels, you’d have to have very big shocks. Of course, you don’t want very big shocks to happen,” he said.
Financial markets expect only one more rate cut from the Bank this year, in November, which would be likely to lower borrowing costs to 4.75 per cent. The pace of Britain’s monetary easing has already fallen behind those of the United States and the eurozone, where authorities have taken a more aggressive approach to help to support economic growth and the jobs market.
In her speech, Greene said household consumption in the UK was lagging behind America and other G7 economies, with spending still below pre-pandemic levels. The Bank expected consumer spending to rise this year as inflation fell, a phenomenon that could help to keep inflation above the Bank’s 2 per cent target, she said.